A worker cuts a sheet of steel at a factory in Ahmedabad. (Photographer: Anindito Mukherjee/Bloomberg)

Did India Return To 8% GDP Growth In Q1 FY19?

With the temporary impact of demonetisation and a new indirect tax system behind it, the Indian economy may return to growth rates last seen two years ago.

Helped by a positive base effect and strengthening conditions across core industries, some economists expect GDP growth in the April-June 2018 quarter to clock at above 8 percent.

The Bloomberg median estimate for GDP growth in the first quarter of FY19 is at 7.6 percent compared with 5.6 percent in the first quarter last year and 7.7 percent in the fourth quarter of FY18.

The range of estimates, however, stretches from a low of 7 percent to a high of 8.2 percent.

Saugato Bhattacharya, chief economist at Axis Bank, expects GDP growth to come in at 8.2 percent with the positive base effect expected to do much of the heavy lifting. Along with that base effect, strength in the industry and strong first-quarter earnings from the corporate sector support his view. Bhattacharya, however, cautions that growth rates will slip in the subsequent quarters.

This high growth is unlikely to sustain, and will fall to around 7.2 percent in the remaining three quarters of FY19. Much of the deceleration is also due to base effects. FY19 growth forecast is 7.4 percent.
Saugata Bhattacharya, Chief Economist, Axis Bank
Did India Return To 8% GDP Growth In Q1 FY19?

Strong Industrial Growth

Economists at HDFC Bank expect GDP growth of 7.6 percent, with industrial growth set to pick up to 8 percent from 0.1 percent in the same quarter last year. Along with the base effect, a genuine improvement in the industrial economy is expected to aid growth.

“For the manufacturing sector, the Central Statistics Office takes private corporate sector growth as a proxy for the organised sector. Corporate earnings have risen by 7.9 percent in the first quarter, led by energy, metals and mining companies and retail lenders,” said Abheek Barua, chief economist at HDFC Bank, in a report on Thursday.

Barua, however, said that it will be important to see whether the momentum in corporate earnings lasts for the rest of the year.

In addition to corporate earnings, other lead indicators have been strong. Passenger and commercial vehicle sales have recorded strong double-digit growth and construction activity is expected to have grown by 8 percent in the April-June quarter, said Barua in his report.

The major push to growth is likely to come from the manufacturing and the service sectors while agricultural growth is also likely to be supportive. On the demand side, private consumption could gain some traction especially on the back of stronger demand as shown by lead indicators like domestic passenger traffic, retail credit and consumer durables.
Abheek Barua, Chief Economist, HDFC Bank

Conflicting Rural Indicators

Urban consumption has remained strong but the indicators coming from the rural economy have been conflicting. While sales of items like tractors and fast-moving consumer goods have remained strong, real wage growth in rural areas has remained weak.

We're not entirely hopeful regarding the agriculture sector in Q1 FY19, wrote Soumyakanti Ghosh, chief economist at State Bank of India, in his report. Ghosh expects GDP growth at 7.7 percent in the first quarter.

Agriculture prices continue to remain depressed and it’s not clear how the MSP may lift prices in the absence of an effective procurement scheme.
Soumyakanti Ghosh, Chief Economist, State Bank of India.

While the outlook for the agriculture sector remains uncertain, Ghosh said growth will be supported by robust manufacturing and services sectors.

Pick-Up In Investment Activity

With demand conditions remaining strong, some of the slack in the economy is getting used. Capacity utilisation was at 75.2 percent at the end of the March quarter, according to RBI data. In turn, a modest pick-up in private investment activity has begun.

In its annual report released on Wednesday, the Reserve Bank of India said that it expects the economy to ‘step up’ its growth trajectory. Significant support to growth has come from gross fixed capital formation, which snapped out of a four-quarter soft patch and expanded between second and fourth quarters of FY18, the central bank said.

For the growth momentum to sustain going forward, infrastructure holds the key, said the RBI.

First, infrastructure holds the key to unleashing the impulses of faster growth. In particular, the reasonable success achieved in the transportation space is worthy of emulation in other areas....Second, even as infrastructure development provides the thrust, sustaining the momentum of growth will hinge around its inclusiveness and, in particular, its employment intensity.
RBI Annual Report 2017-18